Market Insight

Netflix goes global in one fell swoop, launching in 130 new territories

January 11, 2016  | Subscribers Only

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Netflix has executed its global expansion plan by launching in 130 new territories simultaneously. The online-video streaming giant made the announcement at the CES conference and trade show in Las Vegas on 6th January 2015. The US company, which launched its streaming service in the US in 2007, now claims to be available in almost every country worldwide, with exceptions including China, Syria and North Korea.

The service has added Arabic, Korean, Simplified and Traditional Chinese to the selection of 17 languages it already supported, bringing the total to 21.

Our analysis

Netflix’s simultaneous rollout to 130 territories must be seen in a different context to the company’s previous waves of international expansion. There is no indication that it has gone through a substantial localisation process for most of the new countries it has launched in:

  • The library of content is limited to Netflix’s original programming content and international rights deals already in place. No new local content has been added.
  • Content is not available in local languages – either audio or subtitles – if those languages fall outside of the 21 that Netflix supports.
  • In terms of pricing, while some territories (India, the Philippines and Malaysia) have fees stated in local currencies, the majority are in euros.

One of the main purposes the latest expansion serves is that it unlocks the service for legal use around the world. This indicates a shift in Netflix’s attitude to users accessing versions of the service not available in the country in which they are in, and coincides with recent reports that the company has taken an aggressive stance against those who are unlawfully using tools to bypass geolocation restrictions.

Accessing the service in this way has for a long time been a common and relatively widespread behaviour among users, especially prevalent in countries where Netflix was not yet available. The full scale of this problem remains known only to Netflix itself. The practice has prompted persistent disapproval from content holders, who equate it to piracy. Netflix has, however, until now done little to curb this behaviour. It is therefore understood that the recent changes to geolocation restrictions are a result of increased pressure from content holders in light of Netflix’s worldwide expansion. Had Netflix attempted to enforce geolocation blocking before, it would have resulted in a reduction of its potential audience. With the present expansion, this segment of user base will retain access to Netflix’s library, albeit to their region-specific version.

Netflix’s rollout of its international offering and, in most cases, international pricing is similar to waves of the Apple iTunes Movie Store expansion in 2011 and 2012, which also saw international versions of the store rolled out to territories in bulk, with movies priced in USD and no local content added. Services without localisation have struggled to achieve the same level of success as more territory-specific offerings, and four years later most of these territories are still being served by an international version of iTunes.

In an interview following the new international rollout, Reed Hastings, Netflix founder and CEO, compared the current expansion with Netflix’s launch in Brazil, where the key learnings for success in the market were realised in the years following its introduction. With the current worldwide launch, Netflix has launched a platform upon which it aims to build and differentiate the service to fit specifics of every region in the future.

Therefore, although Netflix has unlocked a colossal reachable audience, it does not expect to see anything close to the same levels of growth in new regions as it has achieved in its previous expansions. Instead, it trusts in its ability to collect data for each specific market and, in turn, learn from it and make informed decisions about content aggregation in the future. Crucially, worldwide expansion makes sense in light of Netflix’s growing ambition to produce more original content, which it can make available in new regions at no extra cost.

The biggest risk Netflix has taken in executing its global rollout is that it foregoes the opportunity to make a better first and lasting impression, as consumers and media are directing their attention to the service in its current state. In large markets such as Poland and Russia, consumers were quick to voice their disappointment that the service did not meet their expectations. Most complaints have been about service being overpriced, lacking local content, and having no language support for an already-restricted library of content.

It is also important to note that, as was the case with previous rollouts, the launch of Netflix serves to educate the public on the availability of other online-video streaming services on the market, and also make consumers more receptive to subscription pricing models. This was the case in France, where following the launch of Netflix, the locally competing service, pay TV operator Canal Plus’s CanalPlay, gained, rather than lost, popularity. Now that a significant amount of time has passed since Netflix began its international expansion, local players around the world have had time to prepare and strengthen their online-video offerings – a sufficiently competitive alternative may in fact greatly benefit from the current situation.

Regional outlook:

Netflix in India: A long journey ahead

Broadband household and smartphone penetration in India are fairly low in the context of regional standards for Asia-Pacific, at 6.1% and 14.9% respectively at the end of 2015, according to IHS.

Netflix’s local content is scarce. From Bollywood movies to live cricket, there is high demand for local content in the Indian TV market. Though Netflix has been investing heavily in original programming and international hits such as House of Cards and Orange is the New Black, the service lacks general-entertainment Hindi content, the most-watched genre India.

Furthermore, Netflix’s cheapest plan is priced at Rs500 ($7.50) per month, while rival local services offer monthly plans ranging from free to an average of Rs300 ($4.50). Widespread piracy will be another factor hindering Netflix’s progress in India.

Netflix is also competing with international OTT players including HOOQ and Spuul, with China-based LeTV also expected to launch in India in 2016. In order to succeed, it will be important for Netflix to beef-up its local content library, either through acquisition or partnerships, to create original programming for its Indian audience.

Netflix in Russia: Hurdles to be overcome

The Russian launch is of particular significance given the restrictions on foreign-owned pay TV channels introduced last year. In order to see the Russian launch through, Netflix has to overcome several issues:

  1. Local competition and the prevalence of ad-funded services

Ad-funded video represents more than 80% of total legal online-video revenues. Local broadcasters – Perviy Kanal (1 TV), VGTRK, NTV, CTC and TNT – produce and distribute their programming via ad-based catch-up and live services. Content produced by local broadcasters is by far the most popular and is driving online-video consumption, with this availability of ad-based services making it a challenging environment for pay services.

In spite of this, the pay online video market in Russia is growing steadily, being driven primarily by transactional spending on new-release blockbuster movies available to rent or buy. Local services, including, Okko and TVZavr, report the success of new-release movies being rented or bought via Smart TVs. Early windows, quality of content, a price lower than a cinema ticket and easy access via Smart TV ecosystems, are the pillars of transactional video’s success in Russia.

Subscription online video, however, still struggles to gain traction. Content available via SVoD services are library titles, many of which are available on ad-funded services or can be easily pirated. Exclusive content rights are expensive and are not worth the investment as only a few local services managed to break even in 2015 – most players are understood to operate at a loss. There were, until now, no players in the market that operated on a purely SVoD basis.

  1. Ownership legislation

The 20% foreign ownership cap on Russian media companies came into effect on 1st January 2016. While this act doesn’t clearly define a ‘media company’, the chances are that Netflix will fall under this legislation, and therefore will not be able to operate in Russia without getting a Russian-owned company involved.

Much will hang on this choice of partner. Netflix may form a venture with Media Alliance, a body that channel groups Discovery and Turner also use for their operations in the country. Some signs point to Netflix having already partnered with this group – Izvestiya, a Russian newspaper which shares a parent company with Media Alliance, was the first to report the rumours of Netflix’s launch in the country.

However, there are also regulatory factors at work outside of Netflix (and Discovery and Turner’s) control. The new structure of foreign media ownership is yet to be fully outlined, and Media Alliance’s operations are yet to be formally approved. There is no guarantee that Discovery and Turner will be allowed to operate under Media Alliance, and the new law does not categorically define the terms under which foreign firms should operate. Russian watchdog agency Roskomnadzor has also said that each case would be judged individually. In the best case scenario, the new structure of Media Alliance will be approved, and Netflix will have a much higher chance of a smooth launch.

The new law has proved too much for several international media players. Companies that have already sold parts of their Russian businesses include MTG (which divested its stake in CTC Media to UTH holding, and its Viasat channels to private equity firm Baring Vostok and local businessmen Anatoly Karyakin) and Axel Springer (which sold its Russian business to Alexander Fedotov, owner of Artcom Media publishing house).

  1. Rampant piracy

Despite the joint efforts of industry players and the government, piracy levels in Russia are still high. Roskomnadzor has threatened to indefinitely block the 15 most popular torrent tracker websites unless they remove illegal content. In response, most services have published detailed descriptions on how to use VPNs and proxy services to bypass such a block, proof that Russian piracy is a long way from being stopped.

In another attempt to tackle piracy, Roskomnadzor has appealed to the major Russian and international brands and ad agencies not to place their advertising on illegal websites, in an attempt to cut off revenue streams for pirates.

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